Inter-Tel Pleads Guilty to E-Rate Fraud

The second U.S. corporation this year copped a plea today to bid rigging in
the nation’s troubled E-Rate program.

Inter-Tel Technologies agreed to pay a total $8.71 million in criminal fines, civil settlement and restitution, the U.S. Department of Justice said. Launched in 1997, the E-Rate program helps schools and libraries connect to the Internet.

In a two-count felony charge, Inter-Tel, a subsidiary of Arizona-based
Intel-Tel Technologies, Inc. , was charged with one count
of allocating contracts and submitting rigged bids for E-rate programs in
Michigan and California. The company was also charged with one count of wire
fraud and aiding and abetting by willfully entering into a scheme to defraud
the program in San Francisco.

The illegal practices by Inter-Tel cited by the DoJ included inflating bids, submitting false and fraudulent documents to cover ineligible E-Rate items and using fraudulent documents in the DoJ inquiry.

“This conduct deprived the E-rate program of fair and competitive prices, caused the program to pay for unnecessary, inappropriate, and ineligible
items, and as a result, prevented the program from funding projects at other
schools that should have received funding,” R. Hewitt Pate, assistant
attorney general in charge of the DoJ’s Antitrust Division, said in a

The negotiated deal between Inter-Tel and the DoJ requires the company to
pay $1.71 million in criminal fines and $7 million in restitution and civil
settlement. The plea hearing and sentencing for Inter-Tel is scheduled for
later Wednesday.

“Congress established the E-Rate program to help underprivileged schools
gain access to the Internet,” Kevin V. Ryan, the U.S. attorney for the
Northern District of California, said in the DoJ statement. “I hope these
fines will serve as a deterrent to others who would abuse public money and
deprive other needy schools of much needed funding.”

Inter-Tel did not a return a call requesting comment.

The company joins a subsidiary of NEC America as the first two firms to plead guilty to E-Rate fraud. Under a May plea deal, NEC Business Network
Solutions (BNS) agreed to pay $20.6 million to settle criminal charges involving
the company’s participation in the E-Rate program.

BNS was accused of defrauding the San Francisco Unified School District and
several other school districts around the country through rigged bids and
bribery. According to a civil lawsuit filed in 2001, BNS was part of a
scheme to convince the school districts to purchase more equipment than they

In addition, two Virginia men earlier this year pleaded guilty to fraud
charges in relation to 21 E-Rate applications submitted on behalf of schools
in the Milwaukee and Chicago areas. According to the DoJ, the men conspired
to conduct numerous financial transactions involving the proceeds of the
fraud to conceal and disguise the source of the money. These alleged
financial transactions include wiring more than $600,000 to Pakistan,
purchasing a residence in Kenosha, Wisc., and acquiring several automobiles.

The E-Rate subsidy was added to telephone bills in 1997 under the Clinton
administration and has been dubbed the “Gore tax” for former Vice President
Al Gore’s enthusiastic support. The Federal Communications Commission (FCC)
oversees the program, but outsources administration to the Universal Service
Administrative Company (USAC), a private, nonprofit. Nearly 90 percent of
U.S. schools and libraries receive subsidies from the fund.

Under the program, telecom companies or contractors provide eligible
equipment and services to schools and libraries at a discount, and the
federal government covers the difference through the E-Rate fund.

A favorite target of Republicans, the House and Energy and Commerce
Committee began investigating the program last year following a January 2003
report by the Center for Public Integrity, a non-profit public service
journalism organization that claimed the E-Rate program was “honeycombed”
with fraud.

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